FREDAlert!
Volume
3, Issue 2
August 9, 2011
First: If I were not a featured speaker at a benefit dinner to honor a lifelong friend who passed away recently, I would likely have cancelled this trip. Sorry I am traveling during this turmoil.
Second: We have had questions as to the status of FPO’s on a daily, weekly, and monthly basis. I have mentioned that it is exceedingly rare to see a move below the -20 area. The daily has closed as of today at -19.8 and we have seen it as low as -24 during the crash of 1987. To get to that number would be a close in the 1080 area tomorrow. The Weekly would be at -20 on a Friday close of 1087, and a monthly close of 1040 would put the monthly at -20 at the end of august. These numbers seem extreme but are do-able. Given the position of the daily, we would expect a bounce either today or Wednesday. This move is approaching unprecedented momentum. The bounce could be, and should be very strong, perhaps 1200 or higher on SPX – but it should be retraced as lows are retested.
Third: Given the high momentum as measured by FPO’s and tools such as the McClellan Oscillator, the odds of a divergence bottom are quite high (over 80% in my opinion). What this means is that the market should rally and then test down, making a new CLOSING low such as we mentioned in the weekly report this week (see the recent bottom in SLV on the weekly chart below as an example of this type of move). As we also mentioned, the 5 day moving average is below the 20, and it is unlikely that an upmove of significance can begin until they cross – which implies backing and filling until they move closer together.
Fourth: What to do for clients is the question. If one is looking to add stocks on this drop, Tuesday is likely a good day. Monday is the first day I and my dear friend Walter Murphy can find where not one SPX stock closed positive, in the last 20 years. This suggests an extreme in behavior. Realize that the market will likely revisit these lows after a rally, and add money accordingly – see point above. We are in no hurry to become fully invested in here. We do think that the above average risk we have talked about over the last few letters has been somewhat fulfilled by the drop of the last two days.
Fifth: Gold and gold stocks are a question several subscribers have had. I would be adding mining stocks – GG, NEM, HL are names. Also – two ETF’s we have discussed – PSAU and GDX are likely to outperform – we would add positions in these – slowly, but would start to add.
Sixth:
Big blue chip names like IBM, CVX, T, some of the big cap names in the Sector Review will likely outperform even as the market falls. We would add, again slowly, but would add. For new subscribers – you can find the latest Sector Review on the website: http://www.thefredreport.com/articles/Sector_Review_July2011
We will be out in the field again tomorrow, but will answer emails as we can, and write the midweek tomorrow. Also, especially for new advisors – be sure and call important clients – if you don’t someone else will. Stay in touch with them in this and other tough times.